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FOR THE DISTRICT OF COLUMBIA
UNITED STATES OF AMERICA,
PHILIP MORRIS INCORPORATED,
No. 99-2496 (GK)
the United States of America ("the Government"), brings suit against eleven
tobacco-related entities ("Defendants") (1) to
recover health care expenditures the Government has paid for or will pay for
to treat tobacco-related illnesses allegedly caused by Defendants' tortious
conduct. The Government also asks this Court to enjoin Defendants from engaging
in fraudulent and other unlawful conduct
and to order Defendants to disgorge the proceeds of their past unlawful activity.
Government makes four claims against Defendants under three statutes. The first
statute, the Medical Care Recovery Act ("MCRA"), 42 U.S.C. §§ 2651-2653, provides
the Government with a cause of action to recover certain specified health care
costs it pays to treat individuals injured by a third-party's tortious conduct
(Count 1). The second statute is a series of amendments referred to as the Medicare
Secondary Payer provisions ("MSP"), 42 U.S.C. § 1395y, which provides the Government
with a cause of action to recover Medicare expenditures when a third-party caused
an injury requiring treatment and a "primary payer" was obligated to pay for
the treatment (Count 2). The third statute is the Racketeer Influenced and Corrupt
Organizations Act ("RICO"), 18 U.S.C. §§ 1961-1968 (Counts 3 and 4), which provides
parties with a cause of action to recover treble damages due to injuries they
received from a defendant's unlawful racketeering activity, and to seek other
equitable remedies to prevent future unlawful acts.
matter is now before the Court on Defendants' motions to dismiss for failure
to state a claim. (2) Upon consideration of the
motions, oppositions, replies, the applicable case law, the arguments presented
at the motions hearing, and the entire record herein, for the reasons discussed
below, the Non-Liggett Defendants' motion to dismiss for failure to state a
claim [#72] is granted as to the MCRA claim (Count 1), granted as to the MSP claim (Count 2), and denied as to the RICO claims
(Counts 3 and 4). Liggett's separate motion to dismiss for failure to state
a claim [#70] is denied.
of Legal Conclusions
States Government has brought this massive civil action against the tobacco
industry, seeking billions of dollars in damages for what it alleges to be a
lengthy unlawful conspiracy to deceive the American public about the health
effects of smoking and the addictiveness of nicotine. In order to prevail on
these allegations, the Government has offered three distinct legal theories
of liability. Two of these theories are being rejected, and therefore, Counts
1 and 2 of the Complaint will be dismissed. A significant portion of the Government's
case, however, will go forward, namely its claims under RICO for disgorgement
of all profits Defendants derived from activities, beginning in 1953 and continuing
to the present, related to the alleged pattern of racketeering activity. Consequently,
Counts 3 and 4 of the Complaint will proceed. In sum, while the Government's
theories of liability have been limited, the extent of Defendants' potential
liability remains, in the estimation of both parties, in the billions of dollars.
The scope and complexity of this case will continue to pose significant challenges
to the parties and to the Court.
1. The Government's Medical Care Recovery
Act claim will be dismissed. The congressional intent in enacting MCRA in 1962--at
which time Medicare did not exist and the Federal Employees Health Benefits
Act ("FEHBA") (3) was still in its infancy--was
to provide a means for the Government to recover from third-party tortfeasors (4) medical expenses it had furnished for (primarily military) employees.
Applying the principles from a recent U.S. Supreme Court decision, FDA
v. Brown & Williamson Tobacco Corp.,-- U.S. --, 120 S. Ct. 1291 (2000),
this Court concludes that Congress did not intend that MCRA be used as a mechanism
to recover Medicare or FEHBA costs. The Court reaches this conclusion after
examining the broad context in which MCRA has existed for 38 years--including
its legislative history, the construction given it by those agencies charged
with its interpretation, a body of long-standing state and federal case law,
and its total non-enforcement by the Department of Justice for thirty-seven
of those thirty-eight years.
2. The Government's Medicare Secondary
Payer claim will also be dismissed. MSP permits the Government to seek reimbursement
from insurance entities, when Medicare has paid for health care expenses for
which those entities should have paid. Although MSP also allows the Government
to bring suit against non-insurance entities required to pay for health care
costs under a "self-insured plan," the Government's Complaint contains no allegation
that Defendants have at any time maintained a "self-insured plan," as that term
is defined by MSP and the relevant regulations. Further, it is clear that Congress
did not intend MSP to be used as an across-the-board procedural vehicle for
suing tortfeasors, which is precisely how the Government attempts to use the
statute in this case.
3. The Government's Racketeer Influenced
and Corrupt Organization Act claims will be permitted to go forward. The Government
has adequately alleged, which is all it must do at this early stage in the litigation,
the necessary elements of a RICO claim: that Defendants formed an "enterprise"
which engaged in the requisite "pattern of racketeering activity." In addition,
given the nature and scope of Defendants' alleged prior misconduct, the Government
has adequately pleaded its basis for requesting injunctive relief, including
the specific remedy of disgorgement. (5)
should not be dismissed for failure to state a claim unless it appears beyond
doubt that the plaintiff can prove no set of facts in support of his claim which
would entitle him to relief." Conley
v. Gibson, 355 U.S. 41, 45-46 (1957); see
also Davis v. Monroe County Bd. of Educ., 526 U.S. 629, 654 (1999). At
the motion to dismiss stage, "the only relevant factual allegations are the
plaintiffs'," and they must be presumed to be true. Ramirez
de Arellano v. Weinberger, 745 F.2d 1500, 1506 (D.C. Cir. 1984), vacated
on other grounds, 471 U.S. 1113 (1985); Shear
v. National Rifle Ass'n of Am., 606 F.2d 1251, 1253 (D.C. Cir. 1979).
Despite the sweeping breadth and seriousness of the Government's allegations,
their validity is not for this Court to judge at this time.
The Government's Complaint describes
in detail what it alleges to be a four-decade long conspiracy, dating from at
least 1953, to intentionally and willfully deceive and mislead the American
public about, among other things, the harmful nature of tobacco products, the
addictive nature of nicotine, and the possibility of manufacturing safer and
less addictive tobacco products. Complaint ("Compl.") at ¶ 3. Defendants' conspiratorial
activity includes making numerous "false and deceptive" statements and concealing
documents and research in an attempt to cover-up their deceit. Compl. at ¶ 5.
According to the Government, Defendants continue to "prosper and profit" from
their actions and will continue to do so into the future, unless restrained
by this Court. Compl. at ¶ 6. The specifics of the alleged conspiracy are described
the 1940's and early 1950's, scientific researchers published findings that
indicated a relationship between cigarette smoking and diseases, including lung
cancer." Compl. at ¶ 30. Tobacco companies "closely monitored" this research,
conscious that if the public became aware of these findings, the companies'
profits would likely decline and they would "face the prospect of civil liability
and government regulation." Compl. at ¶ 31. To combat these possibilities, the
chief executives of Defendants American Tobacco, Brown & Williamson, Lorillard,
Philip Morris, and R.J. Reynolds met in late 1953 in New York City, where they
devised a concerted strategy to preserve and expand the market for, and profits
from, cigarettes. Compl. at ¶ 32.
to the Government, the underlying strategy Defendants adopted was simple: to
deny that smoking caused disease and to consistently maintain that whether smoking
caused disease was an "open question." Compl. at ¶ 34. To maintain and further
this strategy, Defendants issued deceptive press releases, published false and
misleading articles, destroyed and concealed documents which indicated that
there was in fact a correlation between smoking and disease, and aggressively
targeted children as potential new smokers. Compl. at ¶ 36.
of the first major steps Defendants took was to announce the formation of an
entity initially known as the Tobacco Industry Research Committee ("TIRC") and
which later became known as the Council for Tobacco Research ("CTR" or "Council"). (6) This entity, which Defendants publicized widely as an objective
research body, published in January 1954 a full-page statement that ran in 448
newspapers throughout the United States. Titled "A Frank Statement to Cigarette
Smokers," the statement asserted that, according to "distinguished authorities,"
"there is no proof that cigarette smoking is one of the causes" of lung cancer.
Compl. at ¶ 37. Defendants further stated: "We believe the products we make
are not injurious to health"--even though Defendants' own employees had by this
time "identified the carcinogenic substances in tobacco smoke." Compl. at ¶¶
37, 38. Promising to aid and assist research into all phases of tobacco use
and health and to provide complete information to the public, the publication
stated that the newly formed Council would perform independent, objective, and
reliable research about the allegations against smoking. Compl. at ¶ 37. (7)
to the Government, CTR was not independent, objective or reliable. Its purpose
was not to research issues of concern to the public, but rather to serve as
a "front" or "cover" for Defendants' conspiracy to conceal the truth about smoking's
health risks. Compl. at ¶ 60. Defendants used CTR to fund "Special Projects"
that were devised to counter evidence of smoking's adverse health effects by
providing alternative explanations for tobacco-related diseases. Compl. at ¶
Government alleges that these projects were designed largely to generate research
data and witnesses for use in defending lawsuits and opposing tobacco regulation,
rather than to ascertain or improve the safety of Defendants' products. To accomplish
this objective, Defendants put attorneys in control of the Council's research
and devised strategies to withhold from civil discovery critical information
about the health effects of cigarette smoking by improperly invoking the attorney-client
privilege and work-product doctrine. Id. If CTR research ever "threatened to confirm the link between smoking and disease,"
Defendants exerted pressure on the scientists conducting the research, so as
to alter the results, terminate the research, and/or conceal the findings. Compl.
at ¶ 67.
Defendants created another entity, the Tobacco Institute ("TI"), a "public relations
organization" whose function was to keep the public, the medical establishment,
the media and the government in the dark about tobacco's health risks, especially
the "connection between smoking and disease." Compl. at ¶ 42.
also entered into what they termed a "gentleman's agreement" not to perform
in-house research on smoking, health, or the development of "safe" cigarettes.
Compl. at ¶ 45. Each Defendant enforced this agreement--a central tenet of the
conspiracy--by obstructing research efforts by any other company. Even when
individual companies performed limited in-house research, the fundamental understanding
remained intact: information that would tend to establish the harm caused by
cigarette smoking would be suppressed and concealed. Compl. at ¶ 48.
Government alleges that over the course of the conspiracy, Defendants have made
numerous misstatements concerning one item in particular: nicotine. Defendants
continually denied that nicotine is addictive, even in the face of overwhelming
evidence to the contrary. Compl. at ¶¶ 71-72. For example, Defendant Brown &
Williamson acknowledged internally in 1963 that "we are . . . in the business
of selling nicotine, an addictive drug." Comp. at ¶ 72. Researchers hired by
Philip Morris in the 1980's concluded that "in terms of addictiveness, 'nicotine
looked like heroin'." Compl. at ¶ 73. Instead of making these results public,
however, Defendant Philip Morris threatened the researchers with legal action,
killed the lab animals, removed the lab equipment and closed the lab down entirely. Id.
in 1963, Defendant Brown & Williamson deliberately withheld from the Surgeon
General research on the addictiveness of nicotine. Compl. at ¶ 74. When the
Surgeon General finally concluded, based on independent research, that nicotine
is in fact addictive, TI attacked and criticized the report as "an unproven
attempt to find some way to differentiate smoking from other behaviors." Id. Defendants have engaged in these and numerous other acts of deception because
they recognize that "getting smokers addicted to nicotine is what preserves
the market for cigarettes and ensures their profits." Compl. at ¶ 71.
only have Defendants denied the addictive powers of nicotine, but it is alleged
that they have also taken non-public actions to increase its potency and make
cigarettes even more addictive. Despite having used "highly sophisticated technologies,"
including the selective breeding and cultivation of tobacco plants, to manipulate
and increase the potency of nicotine in their cigarettes, Compl. at ¶ 77, Defendants
have repeatedly denied that they manipulated the level of nicotine in their
products. Compl. at ¶ 79. A 1994 R.J. Reynolds advertisement, for example, states:
"We do not increase the level of nicotine in any of our products in order to
addict smokers." Compl. at ¶ 81. Defendants also marketed "light" or "low tar/low
nicotine" cigarettes as being less hazardous to smokers, Compl. at ¶ 86, even
though individuals who smoke such cigarettes are "not appreciably reducing their
health risk." Compl. at ¶ 88.
Government also alleges that Defendants suppressed research regarding less hazardous
cigarettes. Phillip Morris, for example, conducted research which concluded
that a "medically acceptable low-carcinogen cigarette may be possible," but
this finding was never released to the public. Compl. at ¶ 105. Indeed, Defendants
have refused to acknowledge the possibility of such a cigarette. Compl. at ¶¶
Government charges that Defendants have "aggressively targeted their campaigns
to children." Compl. at ¶ 96. R.J. Reynolds' Joe Camel campaign is just one
of the most well-known examples of such tactics. Compl. at ¶ 97. Defendants
have advertised in stores near high schools, promoted brands heavily during
spring and summer breaks, given away cigarettes at places where young persons
congregate, paid for product placement in movies with youth audiences, placed
advertisements in magazines with high youth readership, and sponsored sporting
events, rock concerts, and other events of interest to children. Compl. at ¶
96. Defendants have consistently made false and misleading statements that their
expenditures on advertising and marketing were directed exclusively at convincing
current smokers to switch brands, not at enticing children. Compl. at ¶ 100.
Government maintains that all the above misstatements, and fraudulent and conspiratorial
activity are ongoing. Although Defendants have now admitted that there is "a
substantial body of evidence which supports the judgment that cigarette smoking
plays a causal role in the development of lung cancer and other diseases in
smokers," Compl. at ¶ 116, and have conceded that cigarettes are "addictive,"
as that term is used by the public at large. Compl. at ¶ 120, Defendants still
market their products in deceptive and unlawful ways; they conceal documents
relating to the health effects of cigarettes, nicotine and the true nature of
CTR; and they continue to pose a threat "to the health and well-being of the
American public." Compl. at ¶ 124.
Government alleges that the harm caused by the Defendants' decades-long conspiracy
has compelled numerous entities, including the government, to expend immense
resources to treat, alleviate and minimize the resulting disease and devastation.
Compl. at ¶ 6. In this action, the Government seeks to recover some or all of
the "$20 billion annually" it has spent to treat the "injuries and diseases
caused by defendants' products." Compl. at ¶ 5. It also seeks various forms
of equitable relief, including the disgorgement of Defendants' profits, to deter
Defendants and others from engaging in similar conduct in the future.
Motion To Dismiss (8)
A. The Government's Medical
Care Recovery Act Claim
Congress enacted the Medical Care Recovery Act ("MCRA"), which provides in pertinent
case in which the United States is authorized or required by law to furnish
[or pay for] (9) hospital, medical, surgical,
or dental care and treatment . . . to a person who is injured or suffers a disease,
. . . under circumstances creating a tort liability upon some third person .
. . to pay damages therefore, the United States shall have a right to recover
(independent of the rights of the injured or diseased person) from said third
person, or that person's insurer, the reasonable value of the care and treatment
so furnished, to be furnished, paid for, or to be paid for and shall, as to
this right be subrogated to any right or claim that the injured or diseased
person . . . has against such third person . . .
42 U.S.C. § 2651(a), Pub. L. No. 87-693,
§ 1, 76 Stat. 593 (1962).
blush, MCRA's language might seem quite clear. The statute generally provides
the Government with a means to recover from tortfeasors the health care costs
it has expended on behalf of victims of tortious conduct. If the Government
has "paid for" or "furnished" such care, it may seek reimbursement from the
individual or entity that caused the injury. The statute is broadly worded:
Congress could have restricted the Government's ability to obtain reimbursement
in any number of ways, both substantively and procedurally, but it did not.
the specific question before this Court--and it is a difficult one the resolution
of which has enormous ramifications --is whether MCRA, a statute enacted in
1962 and amended in a minor fashion in 1996, covers, or was intended by Congress
to cover, payments made by the United States Government under Medicare and the
Federal Employees Health Benefits Act ("FEHBA") (10) to treat tobacco-related illnesses allegedly caused by Defendants' tortious
a few months ago, the Supreme Court grappled with an equally difficult issue
of statutory interpretation in FDA
v. Brown & Williamson Tobacco Corp., -- U.S. --, 120 S. Ct. 1291
(2000), a case in which it had to decide whether the Food and Drug Administration
possessed authority to regulate tobacco products as customarily marketed. While
this Court fully recognizes that the present case, unlike Brown
& Williamson, does not involve "an administrative agency's construction
of a statute," thereby triggering the two-step Chevron analysis, (11) 120 S. Ct. at 1300 (citing Chevron
U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837
(1984)), the general analytical approach followed in Brown
& Williamson as it relates to statutory construction and congressional
intent is nevertheless instructive and illuminating. Like the Supreme Court
in Brown & Williamson, this
Court's obligation is to ascertain congressional intent by viewing a particular
statute in the context of relevant congressional action taken during and subsequent
to its enactment. Accordingly, there are significant principles articulated
by the Brown & Williamson Court that speak to how the instant case should be resolved.
such principle is that subsequent legislative action may shed light on congressional
intent. "At the time a statute is enacted, it may have a range of plausible
meanings. Over time, however, subsequent acts can shape or focus those meanings."
120 S. Ct. at 1306. (12) In adopting subsequent
statutes, Congress is presumed to act "against the backdrop" of agency statements
regarding the parameters of the agency's authority to act under the original
statute. Id. at 1306-07.
such principle is that agency "interpretations and practices" should be given
"considerable weight where they involve the contemporaneous construction of
a statute and where they have been in long use." Davis
v. United States, 495 U.S. 472, 484 (1990). In fact, congressional action
(or inaction) can, in certain circumstances, be viewed by courts as having "effectively
ratified" an agency's long-standing position. 120 S. Ct. at 1307. (13)
principle announced by the Supreme Court--and one which has more concrete application
in the instant case--is that Congress, "for better or for worse, has created
a distinct regulatory scheme for tobacco products." 120 S. Ct. at 1315. In conjunction
with this scheme, "Congress has persistently acted to preclude a meaningful
role for any administrative agency in making policy on the subject of tobacco
and health." Id. at 1313; see
also id. at 1309 (Congress'
intent was to "preclude any administrative agency from exercising significant
policymaking authority on the subject of smoking and health"); id. at 1315 (Congress has "repeatedly acted to preclude any agency from exercising
significant policymaking authority in the area").
principles delineated above lead this Court to the conclusion that Congress
did not intend MCRA to cover Medicare or FEHBA expenses.
1. Legislative History
to MCRA's legislative history cannot by itself answer the question presented
(i.e., whether MCRA applies
to Medicare and FEHBA expenses), since the record relating to the statute's
enactment is virtually non-existent. Nevertheless, even the sliver of legislative
history that does exist provides the Court with "guidance" in understanding
how Congress meant MCRA to be interpreted. See National Wildlife Federation v. Snow,
561 F.2d 227, 237 (D.C. Cir. 1976); American
Soc'y of Travel Agents v. Blumenthal, 566 F.2d 145, 166 (D.C. Cir. 1977)
("Legislative history can be and often is an important instrument in the determination
of congressional intent.") (Bazelon, C.J., dissenting).
parties agree, and the legislative history confirms, that MCRA was enacted in
response to a 1947 Supreme Court decision, United
States v. Standard Oil Co., 332 U.S. 301 (1947), which held that the
Government lacked a common law cause of action to recover from tortfeasors expenses
the Government had incurred in treating military personnel under its health
care programs. Id. at 314-16. Standard Oil narrowly construed
the Government's authority to recover such expenditures and directed Congress
to enact appropriate legislation if it wished to provide the Government with
more expansive authority. Id. at 315-16.
over a decade, Congress apparently ignored Standard
Oil and did nothing to provide the Government with a statutory cause
of action to recover the medical expenses resulting from care it had provided.
Finally, in 1960, thirteen years after Standard
Oil was handed down, the Comptroller General of the United States submitted
a Report to Congress entitled "Report On Review Of The Government's Rights And
Practices Concerning Recovery Of The Cost Of Hospital And Medical Services In
Negligent Third-Party Cases." See Govt's Opp'n, Appendix ("App.") at 5. The Report's purpose was to "ascertain
the extent, adequacy, and consistency of the rights and practices of the Government
to recover" the costs of health care it furnished to tort victims. Id. In particular, the Report reviewed the ability of four government agencies to
recover their medical costs: the Department of Defense, the Veterans Administration,
the Department of Health Education and Welfare's Public Health Service, and
the Labor Department's Bureau of Employees' Compensation. Id. at 6.
Report explicitly referred to Standard
Oil and what the Comptroller General determined the consequence of that
decision to be, namely, that "each year the Government is not recovering several
million dollars of costs in negligent third-party cases." Id. at 14. The Report labeled this outcome "inequitable" and declared that "the
Government should have the right in all cases to recover its costs of treating
those injured as a result of the negligence of third parties." Id. at 10. The Comptroller General therefore recommended that Congress adopt one
of two options for remedying the problem: enact legislation "in the form of
either a general bill" or amend the statutes governing "the specific agencies
involved." Id. at 10, 20-21.
It should be remembered that Medicare, enacted in 1965, did not exist when the
Comptroller General issued his report, in 1960, but FEHBA did.
to the Comptroller General's Report, Congress chose the alternative of enacting
"a general bill" rather than amending statutes agency by agency. According to
the Senate Report on MCRA, the statute's "purpose" was to
provide for the recovery by the
United States from negligent third persons for the cost of hospital, medical,
surgical, or dental care and treatment furnished by the United States, pursuant
to authority or requirement of law, to a person who is injured or suffers
a disease under circumstances creating a tort liability upon such third
S. Rep. No. 87-1945 (1962), reprinted
in 1962 U.S.C.C.A.N. 2637, 2637 (under heading "Purpose"). Both the House
and Senate Reports state that MCRA would enable the Government to recover expenses
under "[s]tatutes providing for care by the Department of Defense to military
personnel and their dependents, the Public Health Service to Coast Guard personnel
and other classes of persons, and the Veterans' Administration to veterans." Id. at 2639; H. Rep. No. 87-1534,
at 5 (1962).
this language would, by itself, suggest an intent to limit MCRA to the cost
of health care provided to members of the military, the very next paragraph
of the Senate Report discusses the manner in which the Government would be able
to recover payments made under the Federal Employees' Compensation Act ("FECA"). (14) Since that statute covers civilian employees, it is clear that
MCRA was not meant to be restricted to the military.
three documents described above (the Comptroller General's Report, the Senate
Report and the House Report) constitute MCRA's entire legislative history. However,
even more significant than what the legislative history does contain (very little)
is what it does not. Despite the fact that the Comptroller General's Report
expressly refers to FECA--which both parties agree is covered under MCRA--nowhere
in the Report is any mention made of FEHBA, the wide-ranging civilian health
insurance program which had been enacted several years earlier, and which the
Government now claims is also covered by MCRA. Nor did the Senate or House Reports
refer to FEHBA, even in passing. These omissions are, if not in direct conflict,
at least in sharp tension with the Government's position that MCRA applies to
FEHBA. Surely, Congress knew of FEHBA's existence, especially since that statute
had been enacted only five years before MCRA.
the legislative history, and particularly Congress' failure to make any mention
of FEHBA after specifically mentioning other programs covered by the statute,
would by itself suggest that MCRA was not meant to apply to FEHBA, the paucity
of legislative history necessitates a review of other considerations relating
to congressional intent. (15)
2. Agency Interpretations
tool for ascertaining congressional intent is to examine the statements, rulings
and interpretations of government agencies--particularly those agencies entrusted
to administer the relevant statute. Because the Health Care Financing Administration
("HCFA") is the agency charged with administering MCRA, its approach to enforcing
that statute should be given special attention.
initial matter, it cannot be overlooked that HCFA has issued no MCRA-specific
regulations providing for recovery of Medicare or FEHBA costs. In contrast,
agencies that do have, and have always had, an undisputed and established right
to recovery under MCRA, such as those governing the armed services, do have
such regulations in place. See 32 C.F.R. § 199.12 (Civilian Health and Medical Program of the Uniformed Services
("CHAMPUS") MCRA regulations); 32 C.F.R. §§ 842.115-842.125 (Air Force MCRA
regulations); 32 C.F.R. §§ 757.11-757.20 (Navy MCRA regulations); 33 C.F.R.
§ 25.131 (Coast Guard MCRA regulations). (16) No such structure has ever been established by HCFA to collect Medicare or FEHBA
expenses under the general MCRA framework.
several agencies have explicitly concluded that MCRA does not provide the Government
with a cause of action to recover Medicare costs. First, in 1968, the General
Counsel of the Federal Bureau of Health Insurance (which administered Medicare
at that time) issued an Opinion to that effect, stating that Medicare payments
are "insurance benefits," as distinguished from the health care "provided directly
by the federal government" to which MCRA clearly applied. See Subrogation Rights Under Medicare,
For the Defense, Apr. 1970, at 44 (Defs.' Mem., App. J at 67). Second, in 1979,
HCFA issued a ruling that, in cases in which the Government was liable for an
injury under the Federal Tort Claims Act ("FTCA") and Medicare paid the medical
expenses, the victim could retain all payments the Government made to her under
the FTCA. See HCFA Ruling 79-4
(1979), reprinted in 52 Fed.
Reg. 26,088, 26,090 (1987). The rationale underlying this ruling (that Medicare
was not to receive any reimbursement for the care it had provided to the injured
person) was that Medicare was "in the nature of social insurance." Id.
MCRA's enactment in 1962, neither HCFA nor any other administrative agency has
ever indicated, or even suggested, that MCRA applies to Medicare or FEHBA expenses.
These agency statements and silences, taken in conjunction with the absence
of regulations that would formalize and facilitate the Government's recovery
of Medicare or FEHBA costs under MCRA, lend further credence to Defendants'
position that MCRA was never meant to apply to Medicare or FEHBA expenses.
3. Application of
the Brown & Williamson Principles
considered both the legislative history and agency interpretations of MCRA,
the Court's final task is to apply the Brown
& Williamson principles enunciated in Section IV.A.1 to discern what
Congress' intent was in enacting MCRA in 1962 and amending it in 1996. Based
on this examination, the Court must conclude that MCRA does not provide the
Government with a cause of action to recover Medicare or FEHBA expenses. The
legislative history and relevant agency conduct, when taken together, overwhelmingly
support the notion that MCRA was never intended to be used in the way the Government
it is significant that even though FEHBA existed before MCRA's enactment, MCRA makes no reference to FEHBA --either in the statute itself, in the legislative history
or in agency interpretations.
it is striking that the Government had never, prior to the initiation of this
lawsuit in 1999, attempted to recover Medicare or FEHBA costs under MCRA. Although
the Government is correct that mere nonuse of a statute cannot cause the Government
to forfeit powers granted thereunder, see United States v. Morton Salt Co.,
338 U.S. 632, 647-48 (1950), nonuse can be highly significant. When, despite
many opportunities to do so, a government agency refuses to take advantage of
the wide-ranging powers seemingly implicated by a statute's plain language,
courts may presume that Congress did not intend the statute to be given the
meaning that its language, in a vacuum, might imply. See Brown & Williamson, 120
S. Ct. at 1306-07; see also BankAmerica Corp., 462 U.S.
at 130-31 (holding that where Government had not applied a statute in a particular
way in 60 years, it had effectively acknowledged that it lacked authority to
do so); Bunte Bros., 312 U.S.
at 352; National Classification Comm.
v. United States, 746 F.2d 886, 892 (D.C. Cir. 1984). This is particularly
true in this instance, where the broader interpretation of MCRA (i.e.,
that every conceivable type of government expenditure, even under Medicare and
FEHBA, can be recovered under MCRA) had never been advanced by any government entity until thirty-seven years after the statute's
Congress is presumed to act "against the backdrop" of HCFA's interpretations
of the statutes HCFA is entrusted to administer. See Brown & Williamson, 120
S. Ct. at 1306-07. HFCA consistently indicated that it did not understand MCRA
to cover Medicare or FEHBA expenses, and Congress never expressed any disapproval
with HFCA's readings of MCRA. In fact, Congress' enactment of the 1996 amendment
to MCRA, which the parties agree codified the existing manner in which MCRA
was being enforced, can be viewed as a ratification of HFCA's consistent and
narrow interpretation of that statute. 120 S. Ct. at 1307. Congress had the
opportunity to express its displeasure with the restrictive way in which MCRA
was being enforced, but it did not do so.
given Congress' intense involvement in legislative regulation of tobacco, (17) and its keen awareness of "tobacco's health hazards and its pharmacological
effects," 120 S. Ct. at 1313, it is simply impossible to conclude that the Government's
current interpretation of MCRA, either in its original or in its 1996 amended
form, is one that Congress intended. In fact, the Government's reading is in
direct tension with Congress' recognized intent to create a "distinct scheme
to regulate the sale of tobacco products, focused on labeling and advertising,
and premised on the belief that the FDA lacks such jurisdiction under the FDCA." Id. at 1313. It is therefore
particularly difficult to believe that Congress would have intended to subject
tobacco companies to extraordinary financial liability under MCRA, when those
entities are not even subject to rudimentary FDA regulation.
has, through hearings and legislation, closely monitored the cigarette industry.
While, over the years, it may not have adopted the aggressive, pro-consumer
and pro-health stance that many activists have continually fought so hard for,
the inescapable fact is that Congress chose, as a legislative body, to use only
limited measures to regulate tobacco products and minimize their health hazards
to the public. In light of all these considerations, it is simply inconceivable
that the executive branch possessed for so many years (thirty-seven for FEHBA
and thirty-four for Medicare) a statutory weapon that could wield the economic,
and therefore regulatory, clout MCRA would carry if enforced as the Government
advocates. This is especially true given that there has never been any congressional
recognition that this substantial power existed or congressional demand that
it be utilized. Congress' total inaction for over three decades "preclude[s]
an interpretation" of MCRA that would permit the Government to recover Medicare
and FEHBA expenses. (18)
See Brown & Williamson, 120
S. Ct. at 1312.
Accordingly, the Government's MCRA
claim must be dismissed.
B. The Government's Medicare
Secondary Payer Provisions Claim
Medicare Secondary Payer provisions ("MSP"), a series of amendments to Medicare
enacted in 1980 and further amended thereafter, (19) provide the Government with statutory authority to obtain reimbursement for
certain Medicare expenditures. MSP essentially makes Medicare a "secondary"
payer where another entity is required to pay under a "primary plan" for an
individual's health care. See 42 U.S.C. § 1395y(b)(2). If the "primary" payer has an obligation to pay for
such costs, but does not and cannot "reasonably be expected" to do so, Medicare
may make a "conditional payment" and later demand reimbursement from the primary
plan. 42 U.S.C. § 1395y(b)(2)(A) and (B)(ii). If the entity administering the
primary plan refuses to reimburse, the Government may then bring suit against
it to recover the Medicare payments.
plan" is defined in the statute as "a group health plan or large group health
plan, . . . a workmen's compensation law or plan, an automobile or liability
insurance policy or plan (including
a self-insured plan) or no fault insurance . . ." 42 U.S.C. § 1395y(b)(2)(A)
(emphasis added). A "self-insured plan" is in turn defined in the implementing
regulations as an "arrangement,
oral or written . . . to provide health benefits or medical care or [to] assume
legal liability for injury or illness" under which an entity "carries its own
risk instead of taking out insurance with a carrier." See 42 C.F.R. §§ 411.21 (defining the term "plan") (emphasis added) and 411.50(b)
(defining the term "self-insured plan").
this last phrase--"self-insured plan"--on which the Government rests its legal
basis for Count 2 of this lawsuit. The Government's theory, as expressed in
its Opposition to Defendants' Motion to Dismiss, is that Defendants have themselves
assumed the liability stemming from tobacco-related tort suits and, therefore,
as "self-insured" entities, may be sued under MSP.
a motion to dismiss, a complaint "must allege all the material elements of [a]
cause of action." Taylor v. FDIC,
132 F.3d 753, 761 (D.C. Cir. 1997) (internal citations omitted); see
also Croixland Properties Ltd.
Partnership v. Corcoran, 174 F.3d 213, 215 n.2 (D.C. Cir. 1999); Alicke
v. MCI Communications Corp., 111 F.3d 909, 912 (D.C. Cir. 1997).
MSP Count of the Government's Complaint states simply that "defendants are required
and responsible to make payment for the health care costs of Medicare beneficiaries
that were caused by defendants' tortious and unlawful conduct, which costs have
been and will be unlawfully shifted to the United States." Compl. at ¶ 170.
The Complaint does allege, in other words, that Defendants are "required or
responsible . . . to make payment" for certain health care costs, thus tracking
a portion of the statute's language. See 42 U.S.C. § 1395y(b)(2)(B)(ii).
there are a number of "material elements" (20) of an MSP cause of action conspicuously absent from the Complaint. First, the
Complaint does not allege, in even the most conclusory fashion, the existence
of any "primary plan" under which Defendants pay health care costs, despite
the fact that the statute on which the Government bases its claim applies only
to entities required to make payment "under a primary plan." See 42 U.S.C. § 1395y(b)(2)(B)(ii). In fact, the Complaint does not even allege
the existence of any elements of a "primary plan," such as a "plan" or an "arrangement." See 42 C.F.R. § 411.21. Even if the Complaint had made such allegations, it still
fails to allege, or even suggest, that Defendants specifically maintain any
form of "self-insured plan"
(emphasis added), even though this is the only theory on which the Government bases Defendants' liability. (21) Indeed, the Complaint does not allege that Defendants are "self-insured"
in any way.
instances in which the Government has used MSP to seek recovery from entities
that are unquestionably providers of insurance, as is certainly the typical
factual scenario, (22)there
has been no dispute regarding whether defendants maintain a "primary plan,"
since that term expressly includes a "group health plan," a "liability insurance
policy or plan," and other traditional forms of insurance. See 42 U.S.C. § 1395y(b)(2). In those cases, the Government's allegation that defendants
are "responsible" for certain health care costs is sufficient to state an MSP
claim, as it gives "sufficient information to suggest that there exists some
recognized legal theory upon which relief can be granted." See Wells v. United States, 851
F.2d 1471, 1473 (D.C. Cir. 1988) (internal citations and quotations omitted).
instant case, however, the claim of "responsibility" to make health care payments
is entirely conclusory, since Defendants are clearly not insurance entities
and the Complaint is devoid of any allegation that they have established a "plan"
or "arrangement" under which they would be considered self-insured entities
subject to MSP's reach. Without alleging the existence of such a "plan" or "arrangement,"
the Complaint's assertion that Defendants are "required and responsible to make
payment" for certain health care costs fails to give Defendants even the most
rudimentary notice of the Government's theory of liability. See Wells, 851 F.2d at 1473. Accordingly,
the MSP count must be dismissed.
C. The Government's Racketeer
Influenced and Corrupt Organizations Claim
Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. §§ 1961-1968,
prohibits individuals or entities from engaging in racketeering activity associated
with an "enterprise." (23) To successfully state
a RICO claim, the Government must allege "(1) the conduct (2) of an enterprise
(3) through a pattern of racketeering activity." Salinas
v. United States, 522 U.S. 52, 62 (1997) (citing Sedima,
S.P.R.L. v. Imrex Co., Inc., 473 U.S. 479, 496 (1985)).
includes "any individual, partnership, corporation, association, or other legal
entity, and any union or group of individuals associated in fact although not
a legal entity." United States v. Turkette,
452 U.S. 576, 580 (1981) (quoting 18 U.S.C. § 1961(4)). "Racketeering activity"
includes, among other things, acts prohibited by any one of a number of criminal
statutes. 18 U.S.C. § 1961(1). A "pattern" is demonstrated by two or more instances
of "racketeering activity" ("predicate acts") that occur within ten years of
one another. 18 U.S.C. § 1961(5). In this case, the alleged predicate acts are
violations of 18 U.S.C. §§ 1341 (mail fraud) and 1343 (wire fraud).
Government brings its RICO counts (Counts 3 and 4) under two specific subsections
of § 1962. Count 3 is brought under subsection (c), which makes it unlawful
to "conduct or participate, directly or indirectly," in an enterprise through
a "pattern of racketeering activity." Count 4 is brought under subsection (d),
which makes it unlawful to "conspire to violate" subsection (c).
provides both legal and equitable remedies. Plaintiffs may seek treble damages--that
is, three times the value of the damages inflicted on them by a defendant's
unlawful racketeering activity. 18 U.S.C. § 1964(c). In addition, the Court
may in its discretion order equitable remedies, "including but not limited to"
restricting defendants from taking future actions and even dissolving or restructuring
the "enterprise." (24) In the instant case,
the Government seeks to "disgorge" Defendants' past profits associated with
and derived from their alleged unlawful racketeering activity, and to enjoin
them from committing future RICO violations. (25)
1. Future Injunctive Relief
for Liggett, (26) Defendants do not dispute
that the Government has adequately alleged the elements of a RICO claim (i.e.,
"enterprise," "racketeering activity, and "pattern"). What they do dispute is
whether the Government has adequately alleged that Defendants' racketeering
activity will continue into the future, so as to warrant the broad equitable
Government contends that the pattern of the past four decades in which the tobacco
companies have made countless false and deceptive statements, concealed and
destroyed documents, and improperly asserted legal privileges to evade legitimate
civil discovery and government requests, establishes a "reasonable likelihood," SEC v. Steadman, 967 F.2d 636,
647 (D.C. Cir. 1992), that Defendants will continue to violate the law. Accordingly,
the Government requests equitable relief in the form of disgorgement of the
profits they have realized from their criminal activities, for the purpose of
deterring Defendants and others from committing such acts in the future. Govt's
Opp'n, at 92.
concede that "past allegations may be relevant to whether . . . a 'reasonable
likelihood' exists" that such acts will continue into the future, Defs.' Mem.
at 65, but argue that the Government's exclusive reliance on these past violations
and its speculative allegations of future misconduct are too "conclusory" to
justify equitable relief. Defs.' Mem. at 68. Defendants contend that, under
the law of this Circuit, the Government may not rely solely on allegations of
earlier unlawful activity to warrant the imposition of equitable relief. Defs.'
Mem. at 66 n.* (citing SEC v. First
City Fin. Corp., 890 F.2d 1215, 1228 (D.C. Cir. 1989)). Defendants also
argue that, because the RICO predicate acts in this case involve mail and wire
fraud, the command of Federal Rule of Civil Procedure 9(b) that allegations
of fraud be made with "particularity" is applicable, and that the Government
has failed to make the particularized showing required by this Rule. Defs.'
Mem. at 67-68.
Defendants argue that the Master Settlement Agreement ("MSA") which they entered
into with the States enjoins Defendants from engaging in the same unlawful activity
which the Government believes will occur in the future. Defendants point to
various specific MSA provisions that they contend will make equitable relief
in this action unnecessary and unwarranted. Accordingly, they argue that their
"business" (manufacturing, selling and marketing tobacco products) will not
present "opportunities to violate the law in the future," Defs.' Mem. at 66
n.* (citing First City, 890
F.2d at 1228).
responds that, applying the three factors announced in First
City, there is indeed a "reasonable likelihood" that Defendants' past
unlawful conduct will continue into the future. Govt's Opp'n at 86. The Government
maintains it would be able to prove at trial that the past conduct alleged "would
provide strong support for an inference of a risk of future wrongdoing," and
that, to the extent that Defendants argue that the Government is required to
make such a showing now, at the motion to dismiss stage, rather than at trial,
they are simply mistaken. Govt's Opp'n at 87. The Government also denies that
it is required to plead the likelihood of Defendants' future acts of fraud with
particularity under Fed. R. Civ. P. 9(b). It argues that the core purpose of
9(b) is to protect defendants from reputational harm and "strike" suits, and
to provide them with "sufficient information to respond to plaintiff's claims." Firestone v. Firestone, 76 F.3d
1205, 1211 (D.C. Cir. 1996). Finally, the Government contends that Defendants'
reading of Rule 9(b) would "demand access to a crystal ball," Govt's Opp'n at
90, because it would force plaintiffs to describe the detailed contours of acts
which have not yet occurred.
injunctive relief in this Circuit, a plaintiff must show that the defendant's
past unlawful conduct indicates a "'reasonable likelihood of further violation(s)
in the future.'" SEC v. Kenton Capital,
Ltd., 69 F. Supp.2d 1, 15 (D.D.C. 1998) (Kollar-Kotelly, J.) (quoting SEC v. Savoy Ind., Inc., 587
F.2d 1149, 1168 (D.C. Cir. 1978)); SEC
v. Bilzerian, 29 F.3d 689, 695 (D.C. Cir. 1994).
whether there is a "reasonable likelihood" of future violations, the following
factors must be considered: " whether a defendant's violation was isolated
or part of a pattern,  whether the violation was flagrant and deliberate
or merely technical in nature, and  whether the defendant's business will
present opportunities to violate the law in the future." First
City, 890 F.2d at 1228 (citing Savoy
Indus., 587 F.2d at 1168); Bilzerian,
29 F.3d at 695. None of these three factors is determinative; rather, "the district
court should determine the propensity for future violations based on the totality
of circumstances." First City,
890 F.2d at 1228 (citing SEC v. Youmans,
729 F.2d 413, 415 (6th Cir. 1984)).
Government has clearly and overwhelmingly satisfied each of the three First
City factors. First, Defendants cannot possibly claim that their alleged
conspiratorial actions were "isolated." On the contrary, the Complaint describes
more than 100 predicate acts spanning more than a half-century. Second, Defendants
cannot contend that the alleged RICO violations are "technical in nature." The
Government alleges that Defendants' numerous misstatements and acts of concealment
were made intentionally and deliberately, rather than accidentally or negligently,
as part of a far-ranging, multi-faceted, sophisticated conspiracy. Third, Defendants'
business of manufacturing, selling and marketing tobacco products clearly "present[s]
opportunities to violate the law in the future." First
City, 890 F.2d at 1228. As the Government points out, as long as Defendants
are in the business of selling and marketing tobacco products, they will have
countless "opportunities" and temptations to take unlawful actions, just as
it is alleged they have done since 1953. Govt's Opp'n at 87.
contention that the MSA precludes such opportunities is not persuasive. See Defs.' Mem. at 70-77. In arguing that the MSA obviates the need for injunctive
relief, Defendants implicitly ask the Court to make the following two assumptions:
that Defendants have complied with and will continue to comply with the terms
of the MSA, and that the MSA has adequate enforcement mechanisms in the event
of non-compliance. Even assuming the Court could take judicial notice of the
MSA, that document's existence certainly does not mean that the Court can or
should assume that the MSA will be fully enforced or otherwise accomplish its
the decisions Defendants cite for the proposition that past allegations of wrongdoing
alone cannot warrant injunctive relief are inapposite, because those cases all
discuss the standard for proving a reasonable likelihood of future violations, not for pleading it at the motion to dismiss stage. See,
e.g., SEC v. Commonwealth Chem.
Secs, 674 F.2d 90, 100 (2d Cir. 1978); SEC
v. Blatt, 583 F.2d 1325, 1334 (5th Cir. 1978).
the sole decision cited by Defendants which does address the injunctive relief
standard appropriate for a motion to dismiss, SEC
v. Cassano, 61 F. Supp.2d 31 (S.D.N.Y. 1999), clarifies the distinction
between those two very different legal standards. In Cassano,
the court recognized that it was "obliged to accept the truth" of the Government's
allegation that defendants are "likely to violate securities laws in the future,"
"for purposes of this motion to dismiss, and so this aspect of the defendants'
motion must be denied. Whether the [Government] can prove the allegation remains
to be seen." Id. at 34. The
same can be said of the instant case.
Defendants' contention that the Government "must allege "a 'reasonable likelihood'
of future violations--future frauds--with the specificity required by Rule 9(b),"
Defs.' Mem. at 67, simply defies common sense. It is difficult to see how a
plaintiff could ever allege with "particularity" an offense which has not yet
happened. Defendants are able to cite only two decisions, both of which are
from other circuits, in support of this contention: Menasco,
Inc. v. Wasserman, 886 F.2d 681 (4th Cir. 1989) and Continental
Realty Corp. v. J.C. Penney Co., 729 F. Supp. 1452 (S.D.N.Y. 1990).
the defendant's actions "involved a limited purpose," "one perpetrator," "one
set of victims," and the racketeering transaction "took place over approximately
one year." 886 F.2d at 684. The court specifically held that defendant's acts,
as alleged, did not "suggest a 'distinct threat of long-term racketeering activity,
either implicit or explicit.'" Id. (quoting H.J. Inc., 492 U.S.
at 242). It was on this basis, and these facts, that the ourt determined that
plaintiff's allegations of on-going fraud missed the Rule 9(b) mark. In Continental
Realty, the court observed that plaintiff's attempt to "infer a threat
of repeated fraud from a single alleged scheme would in effect render [RICO's]
pattern requirement meaningless." 729 F. Supp. at 1455. Therefore, the court
declared that plaintiff's allegations did not pass Rule 9(b) muster.
decision--nor any other decision cited by Defendants, for that matter--did the
plaintiff allege as many predicate acts (116), as long a duration of racketeering
activity (45 years), as many significant participants (11 entities, which together
control virtually the entire tobacco products market), as many victims (hundreds
of millions of individuals, scores of government entities, the federal government)
or as much money derived from the racketeering acts (hundreds of billions of
Based on the sweeping nature of the
Government's allegations, and the fact that the parties have barely begun discovery
to test the validity of these allegations, it would be premature for the Court
to rule on the propriety of injunctive relief in this case. At a very minimum,
the Government has stated a claim for injunctive relief; whether the Government
can prove it, "remains to be seen."
2. The Specific Equitable
Relief of Disgorgement
contend that even if the Government has alleged the likelihood of future illegal
activity, it is still not entitled to the remedy of disgorgement, (27) because that particular remedy is never available under a civil
RICO count. Defendants contend that civil RICO remedies must be forward-looking,
while disgorgement is, by its very nature, backward-looking. See Defs.' Mem. at 80. They argue that the Government is impermissibly attempting
to convert its civil RICO count into a criminal one by asking for disgorgement,
which is akin to criminal forfeiture of the proceeds of unlawful activity (and
permitted only under criminal, not civil, RICO suits). Defendants contend that
RICO is to be "read in pari materia with the Clayton Act, from which it is in large part derived," Defs.' Mem. at
80, and that disgorgement is not permitted under that act. Finally, Defendants
argue that disgorgement in this case would be "impermissibly punitive" and would
constitute a double recovery, since the Government already seeks billions of
dollars in damages under the Complaint's MCRA and MSP counts. Defs.' Mem. at
Government argues that disgorgement is an available and appropriate remedy for
civil violations of RICO, and that Defendants' claims to the contrary are, in
addition to being legally incorrect, premature at this stage. The Government
argues that RICO's plain language does not foreclose disgorgement, and that
the Supreme Court has held disgorgement generally available unless a particular
statute, "by a necessary and inescapable inference, restricts the court's jurisdiction
in equity." Porter v. Warner Holding
Co., 328 U.S. 395, 398-99 (1946). The Government rejects Defendants'
argument that disgorgement is backward-looking and punitive, arguing that it
is in fact remedial and may properly serve as a deterrent to Defendants and
others who may contemplate committing similar offenses. In addition, the Government
contends that disgorgement in this case would in fact serve a forward-looking
purpose, namely, to prevent Defendants from using proceeds from prior illegal
activities as "capital available for the purpose of funding or promoting [future]
illegal conduct." Govt's Opp'n at 98 n.70 (quoting United
States v. Private Sanitation Indus. Ass'n, 914 F. Supp. 895, 901 (S.D.N.Y.
only court of appeals to consider the question of whether disgorgement is an
appropriate civil RICO remedy, the Second Circuit, has answered in the affirmative. See United
States v. Carson, 52 F.3d 1173 (2d Cir. 1995). The Second Circuit concluded,
based on § 1964's plain language (28) and its
legislative history, that disgorgement is permitted in civil RICO suits. The
court stated that "the legislative history of § 1964 indicates that the equitable
relief available under RICO is intended to be 'broad enough to do all that is
necessary.'" Id. at 1181-82
(quoting S. Rep. No. 617, 91st Cong., 1st Sess. at 79 (1969)).
before the Second Circuit's decision in Carson,
district courts within the Second Circuit had reached the same conclusion. See United States v. Bonanno Organized
Crime Family of La Cosa Nostra, 683 F. Supp. 1411, 1442-49 (E.D.N.Y.
1988), aff'd on other grounds,
879 F.2d 20 (2d Cir. 1989); United
States v. Private Sanitation Indus. Ass'n, 793 F. Supp. 1114, 1151-52
(E.D.N.Y. 1992); United States v. Int'l
Bhd. of Teamsters, 708 F. Supp. 1388, 1408 (S.D.N.Y. 1989). Given that
the only circuit to have addressed the issue has declared, in a well-reasoned
and persuasive opinion, that disgorgement is permissible in civil RICO claims,
and given that Defendants cannot point to a single federal court that has declared
otherwise, this Court is not inclined to categorically rule out that remedy
at the motion to dismiss stage.
argue that because RICO was modeled after the Clayton Act, 15 U.S.C. § 26, and
because a judge of this District Court has declared disgorgement to be unavailable
under the Clayton Act, FTC v. Mylan
Labs., Inc., 62 F. Supp.2d 25, 40-42 (D.D.C. 1999) (Hogan, J.), disgorgement
should likewise be unavailable under civil RICO. Defendants do not explain,
however, why this Court should rely on non-binding federal district court case
law under a different statute, when there is persuasive case law-- albeit from
another circuit--on the precise statute at issue.
the Supreme Court has not, as Defendants contend, declared that the Clayton
Act and RICO should be read "in pari
materia." (29) Defs.' Mem. at 80. Rather,
the Supreme Court has held that while the "Clayton Act analogy is generally useful in civil RICO cases," particular case law interpreting the Clayton Act
"may not apply without modification in every civil RICO case." Klehr
v. A.O. Smith Corp., 521 U.S. 179, 180 (1997) (emphasis added). Equally
important is the fact that Judge Hogan's primary concern in Mylan
Labs--the possibility of "duplicative recoveries" --is not applicable
in this case, since the Court is granting Defendants' motion to dismiss the
non-RICO claims. Accordingly, the Government is provided with only one "route
to defendants' allegedly ill-gotten gains," namely, its civil RICO suit. 62
F. Supp.2d at 41.
Court of Appeals in Carson observed
that whether disgorgement is appropriate in a particular case depends on whether
there is a "finding that the
gains are being used to fund or promote the illegal conduct, or constitute capital
available for that purpose." 52 F.3d at 1182 (emphasis added). This Court has
not made such a finding, nor could it at this stage. So long as disgorgement
is permitted in civil RICO suits as a matter of law, as the Court so concludes,
it would not be appropriate to ask, at the present stage, whether the Government
has proved that it has an adequate basis for seeking such a remedy. Accordingly,
the Court will permit the Government to pursue the remedy of disgorgement and
the motion to dismiss as to this claim must be denied.
Motion To Dismiss RICO Counts
Liggett joins the other Defendants' "broad arguments of general applicability
to the Complaint," Memorandum of Liggett in Support of Motion to Dismiss the
Complaint ("Liggett Mem.") at 1, it has filed its own motion to dismiss the
Complaint's RICO counts, advancing some additional grounds in support thereof.
The RICO Elements
argues that the Government has not sufficiently alleged, as to it, two of the
four elements required for a RICO claim: "enterprise" and "pattern of racketeering
1. RICO's "Enterprise"
earlier, an "enterprise," as that term is used in a RICO claim, is "any individual,
partnership, corporation, association, or other legal entity, and any union
or group of individuals associated in fact although not a legal entity." Turkette,
452 U.S. at 580. It need not have a formal hierarchy or framework, "so long
as it involves some structure, to distinguish an enterprise from a mere conspiracy." United States v. Richardson,
167 F.3d 621, 625 (D.C. Cir. 1999) (internal citations and quotations omitted).
The three elements necessary to establish an enterprise are: "(1) a common purpose
among the participants, (2) organization, and (3) continuity." United
States v. Perholtz, 842 F.2d 343, 362 (D.C. Cir. 1998).
argues that the Government has not adequately alleged the existence of an enterprise.
Specifically, Liggett contends that the Government has failed to show that the
putative enterprise had the requisite "organization." According to Liggett,
the Complaint makes only conclusory allegations, without describing how the
enterprise operated, who its leaders were, or how its decision-making process
functioned. See Liggett Mem.
Court concludes that the Complaint properly alleges the existence of an enterprise,
and Liggett's involvement therein. "It is clear an enterprise can be established
through an informal group of people who come together for the common purpose
of obtaining financial gain through criminal activity." United
States v. Cooper, 91 F. Supp.2d 60, 68 (D.D.C. 2000) (Joyce Green, J.)
(citations omitted). The enterprise can be as simple as an "amoeba-like infra-structure
that controls a secret criminal network." United
States v. Elliott, 571 F.2d 880, 898 (5th Cir. 1978).
argument that the Government must spell out the mechanics or logistics of the
enterprise is unsupported by the case law. Numerous courts, in this Circuit
and others, have established that the kind of allegations contained in the Government's
Complaint are easily sufficient to survive a Rule 12(b)(6) motion. For example,
in Perholtz, the complaint stated:
"Defendant . . . constituted an enterprise . . . to wit, a group of individual,
partnerships, and corporations associated in fact to unjustly enrich themselves
from the proceeds of government contracts . . ." 842 F.2d at 351, n.12. And
in Private Sanitation Ind. Ass'n,
793 F. Supp. 1114, the complaint stated that the enterprise was "a group composed
of, but not limited to" 112 defendants "associated-in-fact for the purpose of
controlling the waste disposal industry in Long Island." Id. at 1126. In both cases, the allegations were deemed sufficient to survive a
motion to dismiss. In the instant case, the Complaint alleges that Defendants
decided on a joint objective to "preserve and expand the market for cigarettes
and to maximize" their profits and "agreed that the strategy they were implementing
was a 'long-term one' that required defendants to act in concert with each other
on the current health controversy, as well as on issues that would face them
in the future." Compl. at ¶¶ 33-34. The nature of these allegations is at least
as detailed as those made in Perholtz and Private Sanitation, if not
more so. Accordingly, the Government has adequately pleaded the enterprise element.
2. RICO's "Pattern Of
Racketeering Activity" Element
of racketeering activity" is defined as "at least two acts of racketeering activity"
committed within a ten year period. In this case, as already noted, the Government
relies on violations of 18 U.S.C. §§ 1341 (mail fraud) and 1343 (wire fraud)
as the "predicate acts" which transform Defendants' alleged misconduct into
"racketeering activity." 18 U.S.C. § 1961(5). The mail fraud statute (31) provides that "[w]hoever, having devised or intending to devise
any scheme or artifice to defraud, or for obtaining money or property by means
of false or fraudulent pretenses, representations, or promises . . . for the
purpose of executing such scheme or artifice or attempting so to do," mails
or causes the mailing of any matter, is guilty of mail fraud. 18 U.S.C. § 1341.
argues that the Complaint does not allege convergence between the party deceived
(individual smokers) and the party whose property was injured (the Government);
according to Liggett, it was the Government that suffered economic injury, not
individual smokers. Liggett Mem. at 29-30. Liggett's convergence argument misstates
the relevant case law. A defendant who uses the mail with the intent of defrauding someone of property is guilty (or in this case, liable), whether
the attempt succeeds or not. See, e.g., Carpenter v. United States,
484 U.S. 19, 26-27 (1987); United States
v. Pollack, 534 F.2d 964, 971 (D.C. Cir. 1976). According to the Complaint's
allegations, Defendants did intend to defraud individual smokers of their property (i.e.,
the money they spent on cigarettes). (32) Moreover,
the Complaint also alleges--though it need not--that Defendants succeeded in defrauding individual smokers. See Compl. at ¶¶ 204(b)-(d).
also argues that the Complaint fails to meet the pleading standard of Federal
Rule of Civil Procedure 9(b), which requires that "the circumstances constituting
fraud . . . shall be stated with particularity." To satisfy this standard, a
complaint must specify "the time, place and content of the false misrepresentations,
the fact misrepresented and what was retained or given up as a consequence of
the fraud." Firestone, 76 F.3d
at 1211 (internal quotations and citation omitted).
Appendix to the Complaint does describe the time, place, and content of each
allegedly fraudulent act, states the fact(s) misrepresented, and names the particular
Defendants involved. See Appendix
at ¶¶ 13, 17, 22, 28, 31, 44, 66, 67, 70, 73, 77, 88, and 112. Although each
allegation does not, in its body, include a statement of "what was retained
or given up as a consequence of the fraud," Firestone,
76 F.3d at 1211, the Complaint does allege elsewhere that the item "given up"
was the money the Government spent on tobacco-related health care. See Compl. at ¶ 6. Accordingly, the Complaint alleges the mail fraud acts with sufficient
Liggett's Alleged Withdrawal From the Conspiracy
also argues that, regardless of whether the Government has generally satisfied
the RICO elements, Liggett has "withdrawn" from the enterprise, and accordingly
the Complaint fails to adequately allege the "enterprise" element as to Liggett
and/or the need for injunctive relief against it.
contends that the "public record" amply demonstrates that it is no longer acting
in concert with the other Defendants, and that there is no reasonable likelihood
it will commit unlawful acts in the future to warrant injunctive relief. Even
if the Court were precluded from considering these outside sources, Liggett
contends that it is "plain from the face of the Complaint that Liggett poses
no risk of committing future acts of racketeering activity" and that the Complaint
"does not, and indeed cannot, make any allegation that Liggett poses a risk
of any future violations of RICO." Liggett Mem. at 19.
Government responds that this Court is "limited to consideration of the facts
alleged in the four corners of the complaint," which do not indicate that Liggett
has withdrawn. Opp'n to Liggett at 10. The Government also contends that it
would be premature, at this early stage, for the Court to determine whether
Liggett threatens to commit future illegal acts or not.
courts may take the "public record" into account when deciding motions to dismiss, (33) that record includes only certain official documents, not mere
newspaper articles. (34) Liggett's evidentiary
support for its claim to have withdrawn from the enterprise consists almost
exclusively of quotations from newspaper articles or from government reports
that are neither part of a public record nor matters for judicial notice. (35) See Liggett Mem.
at 5-10. Accordingly, the Court may not take these documents into account.
reference to the sundry newspaper clippings Liggett cites, its claim to have
withdrawn from the enterprise is wholly unpersuasive. To establish that it is
no longer a member of the enterprise, Liggett must show that it "withdrew from
the conspiracy by an affirmative act designed to defeat the purpose of the conspiracy." See In
Re Corrugated Container Antitrust Litig., 662 F.2d 875, 886 (D.C. Cir.
1981). Because withdrawal is an affirmative defense, the affirmative acts listed
above must "clearly appear on the face of the complaint." Fortner
v. Thomas, 983 F.2d 1024, 1028 (11th Cir. 1993).
Complaint is devoid of any affirmative acts by Liggett that would indicate its
withdrawal from the RICO enterprise. On the contrary, the Complaint expressly
states that "[f]rom at least the early 1950's and continuing
up to and including the date of the filing of this complaint . . . Liggett
. . . did unlawfully, knowingly and intentionally" conduct and participate in,
and conspire to participate in, the enterprise's affairs. Compl. at ¶¶ 172,
201 (emphasis added).
Liggett's attempt to use the Complaint's language to show that it is now a fully
law-abiding corporate citizen, the above quoted language from the Complaint
adequately alleges that Liggett is likely to commit certain racketeering acts
in the future. In addition, given the complex nature of the Government's allegations,
and the fact that numerous allegations simply refer to "Defendants"--without
expressly excluding Liggett (36)--it would be
premature at this time to preclude the Government from pursuing injunctive relief.
Liggett's separate motion to dismiss the Government's RICO Count must be denied.
the reasons stated at length above, Certain Defendants' Motion to Dismiss for
Failure to State a Claim [#72] is granted in part and denied in part.
The motion is granted as to Count 1 (the Medical Care Recovery
Act claim), granted as to Count 2 (the Medicare Secondary Payer
claim), and denied as to Counts 3 and 4 (the Racketeer Influenced
and Corrupt Organization Act claims). The Liggett Group Inc.'s Motion to Dismiss
for Failure to State a Claim [#70] is denied.
will issue with this Opinion.
US District Judge
FOR THE DISTRICT OF COLUMBIA
UNITED STATES OF AMERICA,
PHILIP MORRIS INCORPORATED,
No. 99-2496 (GK)
O R D E R
This matter comes before the Court on Defendants'
motions to dismiss. Upon consideration of the motions, oppositions, replies,
the applicable case law, the arguments presented at the motions hearing, and
the entire record herein, for the reasons discussed in the accompanying Memorandum
Opinion, it is this _______ day of September 2000
that Certain Defendants' motion to dismiss [#72] is granted as to Count 1 (the MCRA claim), granted as
to Count 2 (the MSP claim), and denied as to Counts 3 and 4
(the RICO claims); and it is further
that The Liggett Group Inc.'s motion to dismiss [#70] is denied.
U.S. District Judge
Department of Justice
Civil Division, Torts Branch
P.O. Box 340
Ben Franklin Station
Washington, DC 20044 Timothy
Winston & Strawn
1400 L Street, NW
Washington, DC 20005 Fred
Clifford, Chance, Rogers & Wells
607 14th Street, NW
Washington, DC 20005
1. The eleven Defendants
are: Philip Morris, Inc. ("Philip Morris"), R.J. Reynolds Tobacco Co. ("R.J.
Reynolds"), Brown & Williamson Tobacco Co. ("Brown & Williamson"), Lorillard
Tobacco Company ("Lorillard"), The Liggett Group, Inc. ("Liggett"), American
Tobacco Co. ("American Tobacco"), Philip Morris Cos., B.A.T. Industries p.l.c.
("BAT Ind."), British American Tobacco (Investments) Ltd., The Council for Tobacco
Research--U.S.A., Inc. ("CTR"), and The Tobacco Institute, Inc. ("TI"). The
latter two entities do not manufacture or sell tobacco products, but are alleged
to be co-conspirators in Defendants' tortious activities.
2. Defendant BAT
Ind.'s motion to dismiss for lack of personal jurisdiction is addressed in a
separate Memorandum Opinion issued the same day as this Opinion.
3. FEHBA is codified
at 5 U.S.C. § 8901 et seq.
4. A "tortfeasor"
is an individual or entity that commits a civil wrong for which a remedy, usually
monetary damages, may be obtained. See Black's Law Dictionary (7th ed. 1999).
is defined as the "act of giving up something (such as profits illegally obtained)
on demand or by legal compulsion." See Black's Law Dictionary (7th ed. 1999).
6. According to
the Government, Defendant Liggett did not join the Council until 1964. Compl.
at ¶ 41.
7. Defendants also
established a Scientific Advisory Board ("SAB"), which they claimed was an independent
research arm of the CTR. Compl. at ¶ 61. The Government disputes this, alleging
that the SAB was "closely controlled" by Defendants to prevent it from approving
research that suggested any link between smoking and disease. Compl. at ¶ 62.
8. Section IV specifically
addresses arguments raised by the Non-Liggett Defendants but applies equally
to Liggett, which has joined in this Motion.
9. The bracketed
language was added by a 1996 amendment. See Pub. L. No. 104-201, § 1075, 110 Stat. 2442, 2663 (1996).
10. FEHBA is codified
at 5 U.S.C. § 8901 et seq.
11. Even assuming
that the Department of Justice should be considered an "agency" for purposes
of Chevron analysis, it is entitled
to no deference for its interpretation of MCRA, FEHBA or Medicare, because it
is not the agency entrusted to administer those statutes. "[W]hen an agency
interprets a statute other than that which it has been entrusted to administer,
its interpretation is not entitled to deference." Illinois
Nat'l Guard v. National Labor Relations Auth., 854 F.2d 1396, 1400 (D.C.
Cir. 1988) (citations and internal quotations omitted).
12. To the extent
that the Government contends that the question presented can be resolved by
resort to MCRA's language alone, see Govt's Opp'n at 14-15, its argument is flatly inconsistent with Brown
& Williamson's requirement that statutes like MCRA be viewed in the
context of "subsequent acts."
& Williamson was certainly not the first occasion in which the Supreme
Court expressed such a view. In FTC
v. Bunte Bros., Inc., 312 U.S. 349, 352 (1941), the Court stated: "just
as established practice may shed light on the extent of power conveyed by general
statutory language, so the want of assertion of power by those who presumably
would be alert to exercise it, is equally significant in determining whether
such power was actually conferred." See
also BankAmerica Corp. v. United
States, 462 U.S. 122, 130 (1983).
14. FECA is codified
at 5 U.S.C. § 8132, and provides for unemployment compensation benefits.
15. The Government
contends that there is an additional piece of legislative history relating to
Medicare, not MCRA, which supports its interpretation of MCRA. The Senate Report
accompanying the original Medicare Act states that Medicare will not pay "for
any item or service furnished an individual if neither the individual nor any
other person (such as a prepayment plan) has a legal obligation to pay for or
provide the services," and that under such a circumstance, "the third-party
liability statute 42 U.S.C. 2651-2653 [MCRA] would not apply." S. Rep. No. 89-404,
at 48 (1965), reprinted in 1965
U.S.C.C.A.N. 1943, 1989. Although the Government argues that this is a clear
indication that Congress intended MCRA to apply to Medicare expenses, Govt's
Opp'n at 17, the Court finds this "oblique reference" to the MCRA statute inconclusive
at best, especially when it is evaluated in the larger context of near total
congressional silence concerning any connection between MCRA and the mammoth
Medicare program. See Regular
Common Carrier Conference v. United States, 820 F.2d 1323, 1328 (D.C.
Cir. 1987) (finding that "it strains credulity to suggest . . . that [a] Senate
Report's oblique reference" to a certain exemption "reflects an otherwise unarticulated
intent" to apply that exemption in a way never otherwise mentioned in the legislative
16. For example,
the regulations governing MCRA-recovery of expenses incurred under CHAMPUS require
any person furnished care and treatment under CHAMPUS
(i) To provide complete information
regarding the circumstances surrounding an injury as a condition precedent to
the processing of a CHAMPUS claim involving possible third-party liability.
(ii) To assign in writing to the United
States his or her claim or cause of action against the third person to the extent
of the reasonable value of the care and treatment furnished, or to be furnished,
or any portion thereof;
(iii) To furnish such additional information
as may be requested concerning the circumstances giving rise to the injury or
disease for which care and treatment are being given and concerning any action
instituted or to be instituted by or against a third person;
(iv) To notify the responsible recovery
judge advocate, the CHAMPUS fiscal intermediary or General Counsel, OCHAMPUS,
or other officer who is representing the interests of the government at the
time, of a settlement with, or an offer of settlement from a third person; and,
(v) To cooperate in the prosecution
of all claims and actions by the United States against such third person.
32 C.F.R. § 199.12(e)(2). None of the
above mentioned actions is required of recipients of health care under Medicare
or the FEHBA program.
17. For a detailed
chronology of congressional action in this area, see Brown & Williamson, 120
S. Ct. at 1305-12.
18. There is an
additional reason that the Court reaches this conclusion. When Congress enacted
the 1996 amendment, there was an existing body of case law concerning the "collateral
source" doctrine in which federal and state courts have consistently and uniformly
declared Medicare to be a separate and distinct "social insurance" fund into
which citizens contribute. See, e.g., District of Columbia v. Jackson,
451 A.2d 867, 871-872 (D.C. 1982); Molzof
v. United States, 6 F.3d 461, 466 (7th Cir. 1993); Titchnell
v. United States, 681 F.2d 165, 174-76 (3d Cir. 1982). According to these
cases, it is not the Government, but rather individuals, who "pay for" Medicare.
If this Court were to rule in favor of the Government on the MCRA Count, it
would effectively be declaring that the Government "pays for" Medicare, thus
undermining the viability of a substantial and long-standing body of case law
to the contrary.
19. Pub. L. No.
97-35, § 988, 95 Stat. 604 (1981). The amendments are codified at 42 U.S.C.
§ 1395y, which provides in pertinent part:
In order to recover payment under
this subchapter for such an item or service, the United States may bring an
action against any entity which is required or responsible (directly, as a third-party
administrator, or otherwise) to make payment with respect to such item or service
(or any portion thereof) under a primary plan . . .
42 U.S.C. § 1395y(b)(2)(B)(ii).
20. See Taylor, 132 F.3d at 761.
21. Although the
Government argues in its brief that Defendants are a "self-insured plan," it does not make this allegation
in the Complaint. In fact, the term "self-insured" appears only once in the
entire Complaint. See Compl.
at ¶ 168 (MSP provisions "provide that the Medicare Program will not pay for
the cost of medical care if certain third parties--such as liability insurance
plans, including self-insured plans--have paid, or can reasonably be expected
to pay promptly for those costs). Indeed, the entire MSP Count occupies only
slightly more than one page of the 87-page Complaint.
22. Courts have
uniformly recognized that the statute's clear purpose was to grant the Government
a right to recover Medicare costs from insurance entities. See,
e.g., Perry v. United Food and
Commercial Workers Dist. Unions 405 and 442, 64 F.3d 238, 243 (6th Cir.
1995); Baptist Mem'l Hosp. v. Pan Am.
Life Ins. Co., 45 F.3d 992, 998 (6th Cir. 1995); Evanston
Hosp. v. Hauck, 1 F.3d 540, 544 (7th Cir. 1993); see
also Health Ins. Ass'n of Am.
v. Shalala, 23 F.3d 412, 427 n.* (D.C. Cir. 1994) ("[T]he MSP statute
plainly intends to allow recovery only from an insurer.") (Henderson, J., concurring).
What little legislative history exists is consistent with this interpretation. See H.R. Conf. Rep. No. 96-1479
(1980), reprinted in 1980 U.S.C.C.A.N.
5903, 5924. As of this time, there are no reported decisions in which the Government
has sued a tortfeasor under MSP. One case, in which a private party has brought
such a suit, is currently being litigated. See Mason v. American Tobacco Co.,
Civ. No. 7-97CV-293-X (N.D. Tex.).
23. Although RICO
was originally enacted to "combat organized crime," its application has expanded
far beyond that arena. See, e.g., H.J. Inc. v. Northwestern Bell Tel.
Co., 492 U.S. 229, 248 (1989).
24. Section 1964(a)
states in full:
The district courts of the United
States shall have jurisdiction to prevent and restrain violations of section
1962 of this chapter by issuing appropriate orders, including, but not limited to: ordering any person to divest himself of
any interest, direct or indirect, in any enterprise; imposing reasonable restrictions
on the future activities or investments of any person, including,
but not limited to, prohibiting any person from engaging in the same
type of endeavor as the enterprise engaged in, the activities of which affect
interstate or foreign commerce; or ordering dissolution or reorganization of
any enterprise, making due provision for the rights of innocent persons.
18 U.S.C. § 1964(a) (emphasis added).
the Government requests that the Court issue a "permanent injunction" to prohibit
Defendants and their agents, employees and successors from (1) associating with
persons known "to be engaged in [similar] acts of racketeering"; (2) participating
in the management or control of CTR or TI; (3) making misleading statements
concerning cigarettes; and (4) engaging in "any public relations endeavor that
misrepresents, or suppresses information concerning, the health risks associated
with cigarette smoking or the addictive nature of nicotine." Compl. § VII.B.2.
The Government also requests that
Defendants be ordered to (1) fund, but have no influence or control over, "a
legitimate and sustained corrective public education campaign"; (2) disclose
and disseminate documents relating to the targeting of children; (3) make "corrective
statements regarding the health risks of cigarette smoking and the addictive
properties of nicotine"; (4) fund, but have no influence or control over, "sustained
[cigarette smoking] cessation programs"; and (5) fund, but have no influence
or control over, "a sustained educational campaign devoted to the prevention
of smoking by children. Id.
separate arguments will be addressed in Section V of this Opinion.
27. The Government
seeks to disgorge all the profits that Defendants derived from past unlawful
conduct related to the alleged RICO enterprise, beginning in 1953 and continuing
to the present.
28. See supra note 24 for the relevant
text of § 1964.
29. In fact, this
Latin phrase, which roughly translated means "on the same matter," and which
would suggest that the Clayton Act and RICO should be read in a way to avoid
inconsistencies in their respective interpretations, is not even used in either Klehr v. A.O. Smith Corp., 521
U.S. 179 (1997), or Holmes v. Securities
Investor Protection Corp., 503 U.S. 258 (1992), the two Supreme Court
decisions Defendants cite.
30. See supra Section IV.C, at 33-35.
31. The mail fraud
and wire fraud statutes are construed identically. See,
e.g., United States v. Lemire,
720 F.2d 1327, 1335 n.6 (D.C. Cir. 1983) (citations omitted). At any rate, since
thirteen of the fourteen acts of racketeering alleged against Liggett are mail
fraud, and since a "pattern of racketeering activity" requires two or more acts,
it is the mail fraud, not the wire fraud, analysis which is dispositive in this
32. The Complaint
states: "Defendants and others known and unknown did knowingly and intentionally
devise and intend to devise a scheme and artifice to defraud, and obtain money
and property from, members of the public." Compl. at ¶ 204(a).
e.g., Marshall County Health
Care Auth. v. Shalala, 988 F.2d 1221, 1222, 1226 n.6 (D.C. Cir. 1993); Phillips v. Bureau of Prisons,
591 F.2d 966, 969 (D.C. Cir. 1979).
34. Public records
are "[r]ecords, reports, statements, or data compilations, in any form, of public
offices or agencies, setting forth (A) the activities of the office or agency,
or (B) matters observed pursuant to duty imposed by law as to which matters
there was a duty to report . . . or (C) in civil actions and proceedings . .
., factual findings resulting from an investigation made pursuant to authority
granted by law." Fed. R. Evid. 803(8).
35. The Court
is aware of only one relevant document cited by Liggett which is possibly part
of the public record: a report issued by the Federal Trade Commission entitled
"Competition and the Financial Impact of the Proposed Tobacco Settlement" (Sept.
1997). See Liggett Mem. at 3.
However, Liggett does not quote from the report or indicate in any way how it
would establish Liggett's withdrawal from the enterprise.
e.g., Compl. at ¶ 208 ("After a span of more than forty-five years of
deception and fraud, it would be unreasonable to believe that defendants will voluntarily cease their unlawful conduct, or that their pattern of racketeering
activity will cease without intervention by this Court.") (emphasis added).